Facebook attempts to bite into Snapchat

Snapchat’s 23-year-old CEO, Evan Spiegel, has reportedly declined a £1.84bn cashoffer from Facebook. Snapchat is a photo messaging application whose main demographicis between the ages of 13 and 23. Despite having been downloaded by 9% of US mobile phoneusers and handling 400 million messages everyday, Snapchat has as of yet failed to generate any revenue. Although, Twitter has managed to receive a valuation of £20bn when it floated on November 7th, despite never generating a profit. Only 5 months ago, when Snapchat received a second series of investments, it was valued at £500m.

The Snapchat team urgently needs to find revenue sources. They cannot continue making losses in the long term. Like other similar appcompanies, they could thrive through the use ofadvertisements, however this will most probably cause users to move elsewhere, which is a big issue, because Snapchat is technically easily replicable. It could probably take a couple ofprogrammers a month to come up with an almost identical service. Alternatively Snapchat could sell virtual goods, like some of the online game companies, however this is unlikely to justify Snapchat’s £1.8bn valuation. Unfortunately for Snapchat, their whole model is around the fact that data is never stored. This is set to hinder Snapchat’s success because it means that there is nothing to encourage users the more they use it.Hypothetically, Snapchat users can delete their account and still have their network, as the application relies solely on the user’s address book. If Snapchat cannot keep their users, theywill fail to ‘monetize’ them.

These factors has led me to question Facebook’s strong interest in the two year old company, which would have been their biggest acquisition to date. Facebook has already acquired Instagram, another media sharing application and is planning to introduce a private messaging service within it. This will directly compete with Snapchat in an effort to lure users. On the other hand, Facebook’s bid is understandable to some extent, due to Snapchat’s growing dominance in the picture-sharing market. Snapchat now shares 14% more photos than Facebook. Facebook is simply trying to eliminate the threat of a futurecompetitor. I believe Facebook is willing to pay as much as they need to in order to ensure their longevity and success. But I think Facebook should remain competitive with innovation, not with acquisition. However, no one wants to become the next MySpace.

Burton Biscuit Company

If you love eating biscuits, you must have, at some point, come across Jammie Dodgers and Maryland Cookies. Besides their delicious taste,another similarity between the two brands istheir owners, Burton’s Biscuit Company. Ontario Teachers’ Pension Plan has recently acquired the UK’s number two biscuit maker for an estimated £350m. However, the managerial team has managed to negotiate themselves a small stake in the business, which hasn’t been performing terribly well of late.  Last year, sales dropped by £8m to £333m. This isn’t the first time; Canada's biggest single-profession pension fund has struck in the UK, with their stakes here currently valued at £4.3bn. This represents nearly 6% of theirtotal net assets of £77bn. In fact, just four weeks ago, the fund also purchased the Busy Bees nursery chain. These two companies will now belong to the Fund’s UK rooster, which alsoincludes the likes of Birmingham Airport and Camelot, best known for operating the National Lottery. 

Can the new Bank of England King get the Economy back to its old prosperous ways?

Yesterday 65 year old Mervyn Alister King made way for the new Canadian Governor of the Bank of England, 48 year old Mark Carney. Carney comes into power at a difficult economic time when the UK has struggled to experience significant growth despite numerous efforts. Carney also has big boots to fill after the relatively successful tenure of his predecessor who was governor for 10 years and his monetary policies helped the UK to have positive GDP growth for a long period. However most recently King has been unsuccessful in tackling the economy after the global meltdown in 2007, as after placing in historically low interest rates, growth has failed to pick up.

The Bank of England is no ordinary bank. It is not like a high street bank. So you may be wondering what the Bank of England actually does?

1) The Monetary Policy Committee at the Bank of England (consisting of Governor) meets every month and its main task, set by the government, is to keep inflation at 2%
2) It is looking at what it expects inflation to be in about two years' time, as it assumes changes in rates will take that long to work
3) It sets Bank rate, which is the percentage it charges on loans it makes to banks and other financial institutions. That influences what the banks and building societies charge for loans and mortgages and the returns they pay to savers
4) It acts as the banker for the government. The government needs a bank just as we do.
5) It designs and issues banknotes.
6) It replaces notes that are old

Why are interest rates important?

(To households)
If interest rates are too high, the incentive to save will be high as there will be higher returns on savings. So instead of spending in the firms, households will decide to save instead so there is less consumption. This will cause a fall in business confidence and so less investment and less jobs.

On the otherhand if interest rates are too low then the incentive to save won't be high enough so everyone will spend as returns to savings won't be high enough. Then there will be too much money chasing not enough goods causing the "deathly"inflation

(To Firms)
To encourage growth in the economy Sir Mervyn King dropped interest rates, this reduces the cost of borrowing so this means production costs become lower for firms who take out new Loans and have existing loans . As a result profit expectations become higher, so firms are more willing to invest as there is higher returns for shareholders. This means more jobs and higher GDP. But because business confidence was so low, firms didn't really care about these changes so no growth occurred unfortunately.

Recent interest rate trends

1) January 2003 - January 2008
Fluctuated between 3.5% - 5.7%

2) January 08 - January 2009
Dropped dramtically fallen from 5.5 % to 0.5%

3) March 2009 to January 2013
Interest rates have remained at 0.5%


Mark Carney Profile
Age: 48
Hometown: Fort Smith, Canada
Appointed by: George Osborne, Chancellor of the Exchequer (Tories)
Osborne Description: "outstanding central banker of his generation"
Salary : £620 000 (20% more than King)
Contract Length: 5 years (Normally 8 years)
Previous Employment: Governor of Canada central back
Top banker in Goldman Sachs for 13 years (where he already worked in London)
Education: Went to Oxbridge and Harvard just like King and the 3 other previous governors
Why he's so liked? : With his help, Canada didn't suffer severely like other western countries during recession

Mark Carney is clearly a distinguished banker but just because he's been effective in helping the Canadian Economy, this does not been he'll be able to help us out of Economic mess after all, the UK's GDP is almost twice of Canada's and interest rate mechanisms have significantly different effects due to varying levels of home ownership which makes up a large proportion of UK household expenditure. Whether Carney is successful depends on many factors, but whatever happens, EconomicsMate will keep you updated.

Absence

Sorry guys I haven't been able to post any articles, I've been ill. As soon as I get better, I promise to upload as many as I can!!

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He told me about a fantastic website: getsetapply.com

I wished I had found this website earlier as it would've helped me a lot when making the difficult decision of university courses.

If your looking to apply to Uni later on this year or know anyone that's about to, point them to this helpful shortcut.

Blockbusters goes bust

Like many people I have great childhood memories when I’d borrow games and DVD’s from this legendary store every Friday night. In those days, there was no Love Film and Netflix, so there were no alternatives to having high quality media at cheap, affordable rates. When I heard the news that Blockbusters was closing it really hit home that the physical retail sector was dying and was rapidly being replaced by a new virtual market online.

For those who don’t know Blockbusters is an international provider of movie and video game services with 60.000 employees worldwide, many of them operating in the 1000 store strong American subsidy of the firm. They first opened their doors in the United Kingdom in 1989, after being successfully received by Americans since its launch in the USA four years earlier in 1985. Blockbusters were a very successful business before the emergence of internet competitors such as LoveFilm, now owed by the Internet giant Amazon.co.uk. Also due to the popularity of DVD piracy, the demand for DVD’s is very low, even though some of the most commercially successful firms of all time have occurred in the last decade (Slumdog Millionaire, Avatar, etc). Many people can now watch nearly any widely known film online almost instantly by typing the phrase “Watch (movie name) free online” for free and without leaving their home. Due to this and probably mismanagement too, Blockbusters UK was taken into administration on Wednesday 16^th of January 2013 by Deloitte, a member of the big four audit firms. The firm has shed around 100 stores in the last few years and is set to do so to 160 more of their stores. Its highly likely that 760 people will face redundancies and will be added to the UK’s staggeringly high unemployment pile and unfortunately it is also likely that another 4000 people could risk unemployment if the administrators fail to find a buyer.

Deloitte has said “Having reviewed the portfolio with management, the store closure plan is an inevitable consequence of having to restructure the company to a profitable core which is capable of being sold.”

Blockbusters aren’t the only retailer to be hit by the Internet powershouses, HMV and Jessop’s have also gone into administration. It could be argued that the demand for Camera’s has decreased as these are now incorporated at a high standard into mobile phones, however I'm pretty sure that more people than ever before listen to music, so  ITunes and Amazon MP3 must be the cause for HMV's downfall.

Recently its come to light that Apple, the ITunes Owner only paid 2% in Corporation tax outside the US, which is advantageous in a competitive sense as it means they can afford to reduce prices whilst retaining their profit margins whilst firms like Blockbusters who actually pay the required amount are penalised for doing so. I think tax avoidance is a major issue in the UK, maybe the coalition government wouldn’t have to make as much of their lethal “necessary cuts” if they stopped these multi-national firms stealing openly from Britain’s purse.

Does Reducing Interest Rates always stimulate short term Economic Growth?

Consumption and investment are both major components of Aggregate Demand accounting for almost 80% Aggregate Demand. An important determinant of the AD components value is interest rates which is controlled by the Independent Bank of England using monetary tools. Low interest rates encourage consumers to borrow money from banks due the cheaper cost of repayment, this extra money makes consumers feel wealthier (wealth effect) therefore they’ll be willing to buy more goods from the Market. This causes the AD curve to shift to the right where there is a higher price level, inflation.


Similarly a reduction in interest rates will encourage firms to take out loans, as again the repayment cost will be lower. IN addition lowering interest rates will reduce the incentive of firms to keep money in Banks as the rate of returns will be lower. This money is invested in capital and training of existing and new staff so inefficiency can be decreases. This is shown on the graph below. The productive potential of the economy moves from Point A to Point B, which is closer to the PPF, where ideally where firms and the Country should be operating at.

Cheaper loans are ideal for business confidence s they reduce total cost which is very important for the profit maximising firms which exist in the Capitalist world. This is because cheaper cost will raise the profitability profile of potential business opportunities (Profit= Revenue - Total Cost). This surge of new investments will shift the AD curve to the right, also because of the multiplier effect the curve will shift even further than anticipated. (Multiplier Effect – Initial change in AD causes a greater final impact on the level of national income).

However surely it’s idiotic to believe that a simple change in interest rates will always stimulate short run Economic growth. This has been demonstrated quite well in our economy, the Bank of England committee set interest rates to record low figures. But despite this there wasn't much economic growth and this premature reduction prevented further reduction in the future that could've actually resulted in growth.

Another reason why I fail to agree is because if the interest rate is reduced dramatically consumers won’t be able to respond if they aren't made aware (Information failure) n. Also consumers and firms won’t respond to the reduction tot the reduction if it’s not significant enough and the interest rate is still relatively high. For example if it was cut by only 0.1% to 4.75%, this may not be enough of an incentive for firms and households to take risks on their future capability to pay it back. Also the interest rates set by the Bank of England for high street banks who might decide not to pass these savings onto potential customers to increase their profit margins for its shareholders.

In addition, a fall in interest rates may not always result in short run economic growth of other AD components change. For Example consumption and investment may increase, but this might be countered by a dramatic fall in net exports, which could happen if the newly acquired loans are used to purchase import goods. This will reduce the x-m figure and cause the AD curve to shift to the left if the change is significant enough. This will actually result in a short run decline, not the intended growth.

There are circumstances in which a drop in interest t=rates will result in growth but id largely depends on the position i which the economy is operating on the AD/AS curve. In this example growth has occurred (Y1 to Y2) as the economy isn’t at its optimum, so the price isn’t at its optimum so the price level P1 remains relatively constant, with no inflation occurring. However if the AD curve was originally at AD3, then an increase to AD4 will produce virtually no economic growth but will cause inflation, as the price level rises from p2 to p3.

A fall in interest rates may cause business confidence to increase as profit expectations will be higher. Due to this more investments will occur which will stimulate growth by raising national output and decreasing unemployment. This is most likely to occur if it happens in conjunction with improved tax policies (from firm perspective) and less government market intervention which can result in Government failure. One example of this is the excessive health and safety rules.

In conclusion i strongly believe that reducing interest rates won’t always result in a rise in economic growth due to the complexity of the economy. Therefore it’s wrong to be absolutely certain about economic policies because of this.